Times of change

Few dinner parties pass without excited discussion of house prices. While the dramatic increase in values since the early Nineties have delighted those lucky enough to have bought at the right time, satisfaction with the mortgage lenders remains poor and has resulted in an orgy of remortgaging.

Unhappy with their current mortgages and increasingly better informed, consumers have become “rate tarts”, as they are disparagingly known in the industry, throwing brand loyalty to the wind as they take advantage of one introductory discount after another.

But the mortgage market is about to be buffeted by a series of events, including the probable takeover of Abbey, the second-biggest player, rising interest rates, a cooling housing market and tougher rules on marketing. This last will occur when mortgages come under the jurisdiction of the Financial Authority in October.

Mortgage brands are responding by changing their marketing to focus on customer retention rather than dangling carrots up front. This could mean the brand rather than the product will take prominence in future mortgage advertising.

Royal Bank of Scotland intends to be at the forefront of the new breed of mortgages. Last week, it appointed Clemmow Hornby Inge to create a &£12m advertising campaign for its new mortgage brand First Active (MW last week).

Traditionally, mortgage marketing has been dominated by acquisition marketing at the expense of existing customers, says Ray Boulger, mortgage guru at brokers Charcol. This is reflected in the Council of Mortgage Lenders (CML) figures that show that 39 per cent of the record &£11.3bn mortgage advances made in July were for remortgages. Nevertheless, 61 per cent of mortgagees continue to be on standard variable rates that offer poor value, often two per cent above bank base rates.

A spokesman for Egg says: “Lenders rely on customer inertia and forgetfulness to make their introductory offers viable.” Egg simply offers a standard variable rate of 5.49 per cent, but the lack of marketing support and upfront incentives is reflected in the size of its current book of &£1.2bn, which is dwarfed by Halifax Bank of Scotland (HBOS)’s &£171bn. First Active will have a similar proposition of a low standard variable rate, but it will eschew industry jargon to call it a “lifetime rate”.

First Active will join RBS’s stable of brands, which includes NatWest, Direct Line, Coutts, Churchill and The One Account. It will initially be run together with The One Account, but whereas The One Account is a current account and offset mortgage aimed at well-heeled, aspiring young professionals, First Active is being positioned as a simple, value mortgage brand.

The lucrative mortgage market is dominated by HBOS, which last year took 26 per cent of the market, according to CML. Abbey is the next biggest with a 10.7 per cent share of the market, and Nationwide comes in third with nine per cent. Unsurprisingly, RBS is planning to extend its relatively paltry 6.3 per cent share.

RBS’s connections with Banco Santander Central Hispano, the Spanish bank involved in the &£8.3bn takeover of Abbey, has resulted in a furore, as has HBOS’s expression of interest in buying Abbey. MPs and consumer groups are demanding that any such initiatives be referred to the Competition Commission.

Some industry figures, such as Standard Life Bank chief executive Anne Gunther (also currently chairman of the CML), claim that the market is so fiercely competitive that it can sustain a merger of the two biggest players. She is supported by others who point to the level of remortgaging as a sign of the competitiveness of the market rather than as a sign of consumer dissatisfaction.

Halifax head of mortgage marketing Mark Randerson belongs to this camp. He says: “By having heavily discounted products, the lenders have created a market where remortgaging is here to stay.”

However, lenders without the strength of Halifax’s brand and market share are attempting to move away from the upfront sweetener approach to marketing. “The market has gone a bit mad and there is little brand loyalty,” says an insider from one of the other big players.

Abbey, however, has stolen a slight march on First Active, and has products aimed at customer retention. Under customer proposition director Angus Porter it has launched “Deal for Life” mortgages and “Reward Mortgages”, offering one per cent cash-back every two years.

But the lender is unwilling to totally relinquish the traditional approach, and this week it launches a new discount mortgage with no tie-ins. Likewise, First Active mortgages will still offer some initial incentives.

Abbey director of mortgages Gary Hockey-Morely is disarmingly critical of the current state of the mortgage market. “Consumers are confused by a proliferation of different mortgages together with a proliferation of hidden charges. We are proceeding from the insight that no one wants to have to remortgage every couple of years.”

FSA regulation, intended to clean up the industry, is going to set some tough challenges. Already Direct Line, another Royal Bank of Scotland brand, has had to withdraw temporarily from the market to update its systems to cope with the more stringent requirements the FSA will impose. These will include new strict rules on how mortgages can be marketed and advertised. Previous self regulation by the Mortgage Code Compliance Board meant that lapses were rarely policed.

An advertising agency source describes the new rules as a “nightmare” and “minefield”. Product advantages and disadvantages will have to be given equal prominence in advertising and marketing materials, and there will be no recourse to hiding important features in small print. For instance, instead of proclaiming “2-year discount of 4.5”, a lender will have to say “2-year discount of 4.5 per cent. Redemption penalty of 4 per cent of mortgage”.

While flushing out poor and cynical practice, Boulger believes that the new FSA regulation will result in a switch to more brand-based advertising for mortgages as the rules around product advertising become unattractive. Others suggest it will be only the simplest and most transparent products, such as those First Active will bring to market, that will be promoted with advertising.

If the rules on advertising mortgages succeed in cleaning up the mortgage market, it could make the Government reconsider its reluctance to introduce tighter legislation governing marketing in other controversial areas, such as junk food.

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